On the run up to the decision the market did well, but once the decision came we had the classic – buy on the rumor and sell on the fact as the markets yawned a bit once the deal was sealed. However it does look like for the short term a big negative has been taken away from the market and is likely to rise further on the news. The question is – how long will it take for the deal to come unraveled?

First, the deal sent waves through the sovereign debt markets as traders now see that in fact the EU technocrats will not let anyone fail. So why not lap up those high yielding PIIGS bonds backed by the Troika? Secondly, other PIIGS countries now can think – well Greece got bailed out, so no worries in the short run politically – we too can get a bailout if needed. Finally, clearly this just kicks that can down the road once again as it will be impossible now for Greece to ever recover for years. Its only a matter of time before the people rise up and put in power a new leader that will renege on the deal. Give it 3 to 6 months and this story will come back.

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It began as a investigation into mafia loan-sharking, but gradually expanded as prosecutors used telephone and computer intercepts to unearth evidence of illegal activity surrounding Treasury bonds. The fake securities, worth more than a third of U.S. national debt, were seized in January from a Swiss trust company where they were held in three large trunks. The U.S. Embassy in Rome thanked the Italian authorities and said the forgeries were “an attempt to defraud several Swiss banks”. It said U.S. experts had helped to identify the bonds as fakes.

One has to be amazed with awe of the audacity of these criminals in the sheer volume of $6 trillion. On the other hand one thinks of a local common pick-pocket thief. For every one they catch, at least another 10 get away. How much other money is sloshing around the system that is total fraud? No wonder the rich get richer and the poor get poorer.

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In the mean time this week-end, China concerned more about risks to growth than price pressures, despite an unexpected acceleration in inflation last month,  will cut banks’ reserve requirement ratio by another 0.5 percentage point, effective Feb. 24. A move to help boost liquidity and support the economy. ”This RRR cut is very good news to the market. It will help release liquidity and allow banks to extend more loans,” said HSBC economist Ma Xiaoping, adding that the cut will likely release around 400 billion yuan ($63.5 billion) liquidity.

Global markets are surging on the back of all this liquidity – why the need? It clearly explains the divergence, but does make one wonder what central bankers are seeing that the stock market does not see. At some point this will reverse. The theory (Keynesian economics) is that if we can prime the pump enough to get the economy growing that then central banks can then ease off the pedal and all will be well again. But this assumes that the underlying structure of economies are correct and so this theory can happen gracefully and correctly. The problem is that most of this liquidity is going to a few and not to the people on the ground. The theory will I am afraid not end well. For now its “risk on” until the central banks enter rehab. The withdrawal will be much more painful than people realise.

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But of course austerity seems to be the main economic formula all across Europe. The results from Greece, Spain, Portugal to Ireland … the results are dismal. But if not austerity then what? More spending and more debit? What is the solution? To answer this one must understand some of the problems. In Europe, and primarily in the south of Europe, one of the real issues is FRAUD!!! The fact of the mater is, at all levels in the economy people simply avoid – through fraud – do not pay taxes. I know as I live in southern Europe and its simply true. Call it the Mediterranean life style, it seems to be a sport – kind of a Mafioso mentality. This is from the very rich who bask in offshore bank accounts to the cafes who’s credit card machine breaks at the end of the month to ensure they get a good percentage of their income in cash. It is a real problem. To the northern Europeans its a bit different, they are more sophisticated. They use different company structures, subsidiaries and other financial structures – all to avoid taxes. There are little statistics on this as if the fraud was understood it could be caught. A simpler tax regime is what is needed.

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The goal, absent politics and fear, would appear to the normal observer to be to isolate Iran and depress the value of its currency until the country’s government implodes or the Iranian citizens revolt and the government explodes. Absent that, Israel attacks, or we attack, alleviating Iran’s capability to acquire nuclear weapons; ostensibly for use against Israel or other U.S. interests in the region. Others say its all about the oil and the petrodollar.

Without the petrodollar, some would have you believe that the oil-consuming nations would have to divest themselves of U.S. dollars, via their central bank reserves, and replace them with either euros or whatever currency the party nations preferred. The consequences would be the dollar would crash in value, U.S. currency would collapse, and massive inflation would ensue. Foreign funds would flee from U.S. stock markets and dollar denominated assets, there would be a run on the banks much like the 1930s, and the current-account deficit would become unserviceable. The inevitable result would lead the U.S. budget deficit to go into default creating a severe worldwide depression brought on by the U.S. inability to pay it’s debts.

The better question is whether the middle east conflicts are about petrodollars or petrol. For sure the US benefits greatly by having the world reserve currency – its not just about petrodollars. Besides the US dollar is a fully convertible currency on world markets. The US could function quite easily on petrol priced in another currency – it often is. The issue for the US to be the world reserve currency is to have economic dominance over the world. Cheap oil is the fuel for this. So no its not about WMD or petrodollars – its about maintaining and controlling world oil prices to fuel its economic dominance.

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It would be simple to solve the budget battle if politically leaders wanted to. First one has to remember that budgets are a result of policy – it is not policy in and of itself. One can not merely manage a government, business or household by a spreadsheet. The budget shortfall is a result of poor decisioning. First of all one needs to look at the situation. Historically the US government has run on about 20% of GDP. Current spending is about 25% of GDP and tax collections are around 15%. Clearly a problem. I suggest that the deficit is both a spending and a revenue problem – hardly a position agreed amongst politicians. The following is my recipe to resolve the short fall, while growing the economy and ensuring the social safety net:

1. First we need to attack the ridiculous defense spending. US spends 50% of the global budget for military – hardly necessary. Currently the defense spending is around 8% of GDP, this needs to be brought down with sane foreign policies to at least 5.5% of GDP, wiping out half the spending issues.
2. Secondly the other big budget buster in the US budget is entitlements. Mostly health care. US currently spends 18% of GDP on health care where the rest of the modern world spends on average about 12% of GDP (where a large part of this is paid out of Medicare and Medicaid by the government). In addition the US has one of the worst records of modern countries on health care outcomes. These costs must be brought down via a health care 2.0 bill via a public option, similar to other modern countries. With additional means testing these entitlements policy changes can easily bring down the US budget deficit another 2.5% of GDP (the remaining half of the spending budget gap), not to even speak of the future unfunded liabilities. This can all be done without reducing health care – and possibly even improving it. These first two policy changes can close the spending gap. It is not a budget issue it is a policy issue.
3. Finally on the revenue side, the US tax rates are currently the lowest since 1950. This is not sane. The US needs to make up the 5% of GDP revenue gap via a reasonable progressive tax rate to bring the budget back in line. This would be pro-growth as leveling the opportunity gap would bring on innovation and jobs. The wealthy are not job creators, rather job stifflers – via their casino monopolies and government lobbying manipulation of markets.

In addition, one could consider reducing the US budget to even 18% of GDP over time by elimination of other unnecessary programmes. For the government is over reaching and could be cut further without hurting the poor. To stimulate current and future growth, the US could consider a public/private venture capital fund, that does not add to the deficit (as it would recoup the costs via its investments), to spur on innovation and growth.

Voila…. there you have it – a simple path to a balanced, pro-growth, while preserving the social safety net – budget approach.

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United States is the most significant nation in the world when it comes to international trade. For decades, it has led the world in imports while simultaneously remaining as one of the top three exporters of the world. Main exports are: machinery and equipment, industrial supplies, non-auto consumer goods, motor vehicles and parts, aircraft and parts, food, feed and beverages. Main export partners are: Canada, European Union, Mexico, China and Japan.

So yes it is good news that exports are up for the US. For the US worker it is not such a positive story. Most of the recent export gains are from industries that do not necessarily require a great deal of labor. Perhaps the growth in these raw products shows more of the emerging market growth, rather than the US, as the emerging markets thirst for raw products to feed their export engines. For the US to really become an export dynamo it will need to innovate and not just supply raw products but rather finished products. But its a start…

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Prime Minister Lucas Papademos’ government – an unlikely coalition of the majority Socialists and their main foes, the conservative New Democracy – was expected to carry the vote, even by a narrow margin. Combined, they control 236 of Parliament’s 300 seats, although at least 20 lawmakers from both main parties said they would not back the new private sector wage cuts, pension reductions and civil service layoffs dictated by the draft austerity program.

These endless Greek deadlines are getting exhausting. It seems like each day there is a new key decision or negotiation being made. When will the Greek situation end? When the finally exit the Euro. They need a currency devaluation. Regardless if this current technocratic government gets the latest austerity programme through, there will be a need for another and then another. Does anyone really believe that in the next Greek election they will agree with what the current government is doing? Can the Trioka (European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB)) ever be satisfied that the Greek deal can be sustained? No. This means that the Euro and the risk of contagion will be with us for some time to come. More Euro selling coming.

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First of all what does this settlement do for home owners:

• Former borrowers who lost their homes to foreclosure between January 2008 and last year will be eligible for as much as $2,000 if they indicate on a form to be sent to them that they were the victim of shoddy mortgage practices such as lost paperwork during the loan modification or foreclosure process.
• Delinquent borrowers who are underwater on their mortgages may be eligible for a write-down of the outstanding amount owed on their mortgages, which in effect will modify their mortgage.
• Finally, borrowers who are current on their mortgage payments but unable to refinance because they are underwater, meaning they owe more on the mortgage than the current market value of the home, will be eligible for loan refinancings at lower, but not the lowest, interest rates.

Nationally, a minimum of $17 billion will go directly to homeowners, with the bulk of it to be used for principal reductions, $3 billion for refinancing the mortgages of  underwater borrowers and $1.5 billion for payments to consumers who lost their homes to foreclosure. Another $2.6 billion will go to states to use in foreclosure prevention programs, said people with knowledge of the deal. The federal government will receive $750 million.

So is this a good deal for home owners or the banks? First the banks. The biggest thing it gives banks is to limit their liability. Does this settlement hurt them? Not much, as their liabilities were reportedly as high as $500 billion – so $25 billion is a bargain. If you don’t believe me, the market does. Bank shares hardly made a whimper when the settlement was announced.

Now the home owners. Principle reduction? So if you are responsible and are struggling to pay your mortgage no help for you. If you are in trouble, the government is there to help the home owners who made poor decisions. Fair? Not really. How about the $2,000 to be received by home owners that have been defrauded. When you include the time, inconsequential damages and administration fees its nothing – but you will not have much recourse to sue for more after this settlement. In short not such a good deal for the average home owner. For the markets it is a positive as it removes uncertainty. So score another one for corporate America.

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Earlier studies have found links between low levels of education and higher levels of prejudice, Hodson said, so studying intelligence seemed a logical next step. The researchers turned to two studies of citizens in the United Kingdom, one that has followed babies since their births in March 1958, and another that did the same for babies born in April 1970. The children in the studies had their intelligence assessed at age 10 or 11; as adults ages 30 or 33, their levels of social conservatism and racism were measured.

In the first study, verbal and nonverbal intelligence was measured using tests that asked people to find similarities and differences between words, shapes and symbols. The second study measured cognitive abilities in four ways, including number recall, shape-drawing tasks, defining words and identifying patterns and similarities among words. Average IQ is set at 100. Social conservatives were defined as people who agreed with a laundry list of statements such as “Family life suffers if mum is working full-time,” and “Schools should teach children to obey authority.” Attitudes toward other races were captured by measuring agreement with statements such as “I wouldn’t mind working with people from other races.” (These questions measured overt prejudiced attitudes, but most people, no matter how egalitarian, do hold unconscious racial biases; Hodson’s work can’t speak to this “underground” racism.) As suspected, low intelligence in childhood corresponded with racism in adulthood. But the factor that explained the relationship between these two variables was political: When researchers included social conservatism in the analysis, those ideologies accounted for much of the link between brains and bias.

Wow this is pretty damming claim to make. Lets test this in the trader and financial industry. As you may have noticed when watching CNBC and other business channels most of the guests that come on are mostly conservative leaning. If conservatives have lower IQ, then why are they so smart to make so much money? Dumb luck? On the other hand it was these guys who did crashed the economy. Clearly something does not add up in this study. Perhaps it is in how the study defines IQ and conservatives. Perhaps it is the more structure in the nature of conservatives that allow for the 1% smart vs. the 99% not so smart – making the average lower than liberals. Or a more sinister view – its just another liberal plot to attack conservatives.

Bring this conversation back to earth a bit, this article gives me thought on the question of IQ and personality in relation to what makes a good trader. I have my own suspicions based upon the over 50 to 75 traders I have worked with through our Trader Programme. I do believe there is a relationship but not sure exactly what it is and why. I have searched the web for articles on this and have not really found anything based upon actual data – rather people’s prejudices – which of course I could succumb to as well in my own suspicions. I am working on further ideas in this area to take advantage of this in our programmes.

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Job openings in the private sector reached the highest point in almost three and a half years. Manufacturers, retailers and professional and business services all posted gains. Professional and business services include temporary jobs. But they also include high-paying positions, such as architects, engineers and accountants. The report on job openings follows Friday’s optimistic employment figures. Those showed employers added 243,000 net jobs in January, and the unemployment rate fell to 8.3 percent.

This means the “risk on” trade continues and the equity markets grind higher. At the same time the ECB just printed 1/2 trillion dollars of government welfare for banks and the Fed acts like impending doom is around the corner with their freebie rate policy. So what gives? Are the central banks wrong? No not really, the improvements we are seeing are clearly Fed and stimulus induced, with the hope they are priming the pump for the economy to finally start on its own. Since structural issues are not being fixed, their strategy for the most part will not in the end work. But it does kick the can down the road and for the short run, so the “risk on” trade will continue until it doesn’t.

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His centrist PDL party scores less than 20 percent in opinion polls, with a parliamentary election due late this year. Victor Ponta, leader of the leftist USL opposition alliance which has more than 50 percent support in opinion polls, said last week he wanted an early election and was committed to working with the IMF. “It’s very likely that the next prime minister will be a technocrat, probably from the central bank or even someone from the central intelligence services ,” said a local political commentator, Mircea Marian.

There seems to a pattern developing here. Similar to the unelected prime ministers of Italy, Greece and partially Ireland – when politicians can’t make decisions on their economic future they give up to the unelected technocrats. In the end these technocrats make the same decisions that the prevailing leaders would have made, but the technocrats will become expendable once the distasteful decisions are made. This is not so different that what the US did when it recently succumb to the automatic technocratic budget cuts when its super committee could not do the cuts themselves.

Perhaps this technocratic approach is politically digestible to the citizens of these countries for the moment, but one does wonder where the leadership is. Where are the leaders that can stand up to have a plan that most can agree to and live together with its consequences. Are people just ungovernable? Or is the current western style of corporate capitalism simply can not meet the needs of a modern nation?

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Of course, the casual correlation doesn’t imply causation. Some financial experts are highly dubious of the tendency. Perhaps its all part of the random walk theory. The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. It is consistent with the efficient-market hypothesis. The Madonna halftime show was a bit 90s and congratulations to the GIANTS, but I would not use this indicator to trade your account, though this year it could be correct again.

Now can we please get back to trading?

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The American Civil Liberties Union has sued the government on behalf of Americans who believe they’re on the no-fly list and have not been able to travel by air for work or to see family. ”The news that the list is growing tells us that more people’s rights are being violated,” said Nusrat Choudhury, a staff attorney working for the ACLU’s national security project. “It’s a secret list, and the government puts people on it without any explanation. Citizens have been stranded abroad.”  The government will not tell people whether they’re on the list or why they’re on it, making it impossible for people to defend themselves, Choudhury said. People who complain that they’re unfairly on the no-fly list can submit a letter to the Homeland Security Department, but the only way they’ll know if they’re still on the list is to try to fly again, she said.

The United States is trying to promote international tourist travelers via visa reform which received in a big push forward when President Barack Obama spoke about its potential positive implications and announced the creation of a task force to accelerate visa reform plans. Hoteliers across the U.S. celebrated Obama’s remarks, saying efforts to ease the burden of traveling to the U.S. from important business partner countries like Brazil, India and China would directly affect the hotel industry. However in short doing business in America is not getting easier and will hurt overall growth, when you here reports like this. One of the cost of the war on terror. Is it worth it?

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Open mouth insert foot. GOP front-runner Mitt Romney said this morning that he’s not concerned about the plight of the country’s very poor because there are social safety nets that take care of them. ”I’m in this race because I care about Americans,” Romney told CNN’s Soledad O’Brien this morning after his resounding victory in Florida on Tuesday. ”I’m not concerned about the very poor. We have a safety net there. If it needs repair, I’ll fix it.” “I’m not concerned about the very rich, they’re doing just fine. I’m concerned about the very heart of the America, the 90, 95 percent of Americans who right now are struggling and I’ll continue to take that message across the nation.”

The CNN anchor pressed Romney: “You just said I’m not concerned about the very poor because they have a safety net. And I think there are lots of very poor Americans who are struggling who would say that sounds odd. Can you explain that?” Yes his remarks do sound odd and clearly outlines how the 1% think. Lets break down his comments.

First of all, are the poor only 5 to 10% of the US population? According to the U.S. Census Bureaudata released Tuesday September 13th, 2011, the nation’s poverty rate rose to 15.1% (46.2 million) in 2010, up from 14.3% (approximately 43.6 million) in 2009 and to its highest level since 1993. In 2008, 13.2% (39.8 million) Americans lived in poverty. So a president Romney will not be concerned for 46.2 million Americans? – good politics Mitt. And what about these safety nets?  All other industrialized nations do more to lift their children out of poverty than the United States, according to a recent survey by the Luxembourg Income Study. Without government tax and transfers, for example, France and the US would both have 25% of their children in poverty. In France, government action has slashed that figure to 6.5%. In the US, government policy reduces the figure only marginally to 21.5%. With more than one in five of its children below the poverty line, the US easily heads the child poverty league. So will Mitt fix this – I doubt it.

Mitt, your concern for the less fortunate and poor is well understood. Yes Mitt, open your mouth and insert your foot.

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